Tax Extenders Bill Passes Congress, President Expected to Sign into Law
On December 16, the Senate brought to an end this year’s tax extenders drama, passing a bill that extends all but a few tax provisions that expired at the end of 2013 through the end the current year. The President is expected to sign the Tax Increase Prevention Act of 2014 (TIPA) into law later this week. H.R. 5771 (12/16/2014).
Tax Extender CLIENT LETTERS are available on Parker Tax Pro Library site …
Practice Aid: See ¶320,132 for a sample client letter explaining how TIPA applies to businesses, and ¶320,133 for a letter explaining how the law applies to individuals. Note that Parker’s year-end tax planning letters have also been updated to reflect the new law. See ¶320,134 for the updated year-end letter for businesses, and ¶320,135 for updated letter for individuals.
TIPA extends retroactively for one year, through the end of 2014, virtually all of the tax breaks that had previously been temporarily extended by the American Taxpayer Relief Act of 2012 (ATRA). In addition to the extensions, TIPA corrects numerous technical and clerical errors in the tax code, as well as eliminating many superfluous provisions (known as “deadwood”).
The following is an overview of the key provisions and extensions taxpayers should be aware of when filing their 2014 tax returns.
Individual Tax Extenders
TIPPA extends the following tax breaks for individuals through the end of 2014:
State and Local General Sales Taxes Deduction: Taxpayers can elect to deduct state and local general sales taxes, instead of state and local income taxes, as an itemized deduction on Schedule A (Form 1040), Itemized Deductions. The taxpayer may either deduct the actual amount of sales tax paid in the tax year, or, alternatively, an amount prescribed by the IRS. TIPA extends the availability of that election to tax years beginning before January 1, 2015. See Parker Tax ¶83,130.
Mortgage Insurance Premiums Treated as Qualified Residence Interest: Taxpayers can treat amounts paid during the year for qualified mortgage insurance as qualified residence interest. To qualify for this treatment, the insurance must be in connection with acquisition debt for a qualified residence, and the insurance contract must have been issued after 2006. This deduction phases out ratably for taxpayers with adjusted gross income of $100,000 to $110,000 (half those amounts for married taxpayers filing separately). TIPA extends this treatment to amounts paid or accrued before January 1, 2015. See Parker Tax ¶83,515.
Exclusion for Discharge of Qualified Principal Residence Indebtedness: Income from the discharge of qualified principal residence indebtedness is generally excludable from gross income. TIPA extends the exclusion to debt that is discharged before January 1, 2015. See Parker Tax ¶76,125.
Above-the-Line Deduction for Qualified Tuition and Related Expenses: Taxpayers with modified adjusted gross income within certain limits may deduct up to $4,000 of qualified education expenses paid during the year for themselves, their spouses, or their dependents. The maximum deduction is $4,000 for an individual whose adjusted gross income for the tax year does not exceed $65,000 ($130,000 in the case of a joint return), or $2,000 for other individuals whose adjusted gross income does not exceed $80,000 ($160,000 in the case of a joint return). For those with incomes above the maximum threshold, no deduction is allowed. TIPA extends the availability of the deduction to tax years beginning before January 1, 2015. See Parker Tax ¶80,145.
Tax-Free Distributions from IRA Plans for Charitable Purposes: A qualified charitable distribution from an individual’s IRA is excluded from the individual’s gross income. TIPA extends the exclusion from IRAs of individuals at least 70 1/2 years of age, up to $100,000 per taxpayer per year. TIPA extends the exclusion for qualifying distributions made before January 1, 2015. See Parker Tax ¶134,560.
Deduction for Certain Expenses of Elementary and Secondary School Teachers: Elementary and secondary school teachers can deduct from gross income up to $250 of qualified expenses they paid during the year. If spouses are filing jointly and both were eligible educators, the maximum deduction on the joint return is $500. However, neither spouse can deduct more than $250 of his or her qualified expenses. TIPA extends the deduction through tax years beginning before 2015. See Parker Tax ¶80,135.
Parity for Employer-Provided Mass Transit and Parking Benefits: The value of the qualified transportation benefits provided by an employer to an employee is excludable from the employee’s gross income to the extent the value does not exceed certain dollar limitations. TIPA extends through 2014 the maximum monthly exclusion amount for transit passes and van pool benefits to $250 per month so that these transportation benefits match the exclusion for qualified parking benefits. See Parker Tax ¶76,125.
Contributions of Capital Gain Real Property Made for Conservation Purposes: An individual taxpayer’s deduction for qualified conservation contributions is generally limited to 50 percent of the taxpayer’s adjusted gross income (AGI), minus the taxpayer’s deduction for all other charitable contributions. TIPA extends this deduction, and also extends the enhanced 100 percent deduction for certain individual and corporate farmers and ranchers for contributions of property used in agriculture or livestock production. These deductions are availabe for qualifying contributions made before January 1, 2015. A qualified conservation contribution is a contribution of a real property interest to a qualified organization, exclusively for conservation purposes. See Parker Tax ¶84,180.
Business Tax Extenders
TIPA extends forty-one tax relief provisions for businesses, including the research and development tax credit, bonus depreciation, and increased expensing limitations and the treatment of certain real property as Code Sec. 179 property. A rundown of the more important provision follows.
50 Percent Bonus Depreciation: Businesses can recover the cost of capital expenditures over time through depreciation. In 2012 and 2013, taxpayers were entitled to take 50 percent bonus depreciation for investments placed in service during those years. TIPA extends the 50 percent bonus depreciation provision for qualifying property purchased and placed in service before January 1, 2015 (before January 1, 2016, for certain longer-lived and transportation assets) and also allows taxpayers to elect to accelerate some AMT credits in lieu of taking the bonus depreciation.. The provision also continues a special accounting rule involving long-term contracts and a special rule for regulated utilities. See Parker Tax ¶94,120.
Increased Section 179 Expensing Limitations: TIPA extends the increased small business expensing limitation and phase-out amounts ($500,000 and $2 million respectively; without the extension the amounts would be $25,000 and $200,000, respectively). The special rules that allow expensing for computer software, qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property are also extended to purchases made prior to January 1, 2015. See Parker Tax ¶94,701.
Research Tax Credit: Taxpayers are allowed a credit for certain research expenses paid or incurred in a trade or business. The research tax credit, generally allows taxpayers a 20 percent credit for qualified research expenses or a 14 percent alternative simplified credit. TIPA extends this credit for research and experimental expenses incurred before January 1, 2015. See Parker Tax ¶104,900.
15-year Straight-Line Cost Recovery for Qualified Improvements: Qualified leasehold improvement, qualified restaurant buildings and improvements, and qualified retail improvements placed in service before January 1, 2012, were subject to special rules. Taxpayers could recover the cost of such assets over a 15-year period rather than the longer 39-year period they would otherwise be required to use. TIPA extends the 15-year recovery period for qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property to property placed in service during 2014. See Parker Tax ¶94,315.
Exclusion of 100 Percent of Gain on Certain Small Business Stock: Generally, a taxpayer other than a corporation may exclude 50 of the gain from the sale of certain small business stock acquired at original issue and held for at least five years. However, TIPA extends a temporary exclusion, introduced by ATRA, of 100 percent of the gain on certain small business stock for non-corporate taxpayers to stock acquired before January 1, 2015, and held for more than five years. This provision also would extend the rule that eliminates such gain as an AMT preference item. See Parker Tax ¶116,165.
Reduction in S-corporation Built-In Gains Recognition Period: Generally, under Code Sec. 1374, a corporate-level tax, at the highest marginal rate applicable to corporations is imposed on an S corporation’s net recognized built-in gain that arose before the conversion of the C corporation to an S corporation and is recognized by the S corporation during the recognition period, i.e., the 10-year period beginning with the first day of the first tax year for which the S election is in effect. However, TIPA extends, to sales of assets occurring prior to January 1, 2015, the rule reducing to five years (rather than ten years) the period for which an S corporation must hold its assets following conversion from a C corporation to avoid the tax on built-in gains. See Parker Tax ¶31,785
New Markets Tax Credit: TIPA authorizes the allocation of an additional $3.5 billion of new markets tax credits for 2014. The credit encourages taxpayers to make loans to, or invest in, businesses in low-income communities. See Parker Tax ¶106,201.
Work Opportunity Tax Credit: The work opportunity credit allows employers a 40 percent credit for qualified first-year wages paid or incurred during the tax year to individuals who are members of a targeted group of employees. TIPA extends through 2014 the work opportunity tax credit. See Parker Tax ¶104,501.
Basis Adjustment to Stock of S Corps Making Charitable Contributions of Property: The Pension Protection Act of 2006 amended Code Sec. 1367(a)(2) to provide that the decrease in shareholder basis under Code Sec. 1367(a)(2)(B) by reason of a charitable contribution of property is equal to the shareholder’s pro rata share of the adjusted basis of such property. TIPA extends this rule for charitable contributions made before 2015. See Parker Tax ¶31,960.
TIPA also extends the following tax provisions through the end of 2014:
- Look-through treatment of payments between related controlled foreign corporations under foreign personal holding company rules.
- Temporary minimum low-income housing tax credit rate for non-Federally subsidized buildings.
- Military housing allowance exclusion for determining whether a tenant in certain counties is low-income.
- Indian employment tax credit.
- Railroad track maintenance credit.
- Mine rescue team training credit.
- Employer wage credit for employees who are active duty members of the uniformed services.
- Qualified zone academy bonds.
- Classification of certain race horses as 3-year property.
- 7-year recovery period for motorsports entertainment complexes.
- Accelerated depreciation for business property on an Indian reservation.
- Enhanced charitable deduction for contributions of food inventory.
- Election to expense mine safety equipment.
- Special expensing rules for certain film and television productions.
- Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico.
- Modification of tax treatment of certain payments to controlling exempt organizations.
- Treatment of certain dividends of regulated investment companies.
- RIC qualified investment entity treatment under FIRPTA.
- Subpart F exception for active financing income.
- Look-through treatment of payments between related controlled foreign corporations under foreign personal holding company rules.
- Empowerment zone tax incentives.
- Temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands.
- American Samoa economic development credit.
Energy Tax Extenders
TIPA extends multiple tax incentives for alternative and renewable energy sources.
Credit for Nonbusiness Energy Property: Taxpayers can receive credits for purchases of nonbusiness energy property (a.k.a. residential energy credits). The provision allows a credit of 10 percent of the amount paid or incurred by the taxpayer for qualified energy improvements, up to $500. TIPA extends this credit to purchases made before January 1, 2015. See Parker Tax ¶101,505.
Credit for Energy-Efficient New Homes: Certain contractors are allowed a credit for constructed or manufactured qualifying energy efficient homes in the year such homes are sold or leased to other persons for use as a residence. The amount of this energy efficient home credit is $2,000 or $1,000, depending on whether the home is constructed or manufactured and on the energy saving standards satisfied. TIPA extends the tax credit through 2014for manufacturers of energy-efficient residential homes. See Parker Tax ¶107,801.
Incentives for Biodiesel and Renewable Diesel: The provision would extend through 2014 the $1.00 per gallon production tax credit for biodiesel, and the small agri-biodiesel producer credit of 10 cents per gallon. The provision also extends through 2014 the $1.00 per gallon production tax credit for diesel fuel created from biomass. See Parker Tax ¶104,725.
TIPA also extends the following energy tax provisions through the end of 2014:
- Second generation biofuel producer credit.
- Production credit for Indian coal facilities placed in service before 2009.
- Credits with respect to facilities producing energy from certain renewable resources.
- Special allowance for second generation biofuel plant property.
- Special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities.
- Excise tax credits relating to certain fuels.
Extenders Relating to Multiemployer Defined Benefit Pension Plans
Automatic Extension of Amortization Periods: TIPA extends through 2015 the ability of multiemployer pension (ME) plans to take an additional five years to amortize funding shortfalls. The proposal was enacted in the Pension Protection Act of 2006 (PPA), but expires at the end of 2014. ME plans generally have 15 years to amortize shortfalls and can seek Treasury approval for an additional ten years. A plan receiving such Treasury approval may not combine the two extensions.
Shortfall Funding Method and Endangered and Critical Rules: TIPA extends through 2015 the special rules for three categories of severely underfunded ME plans. It also would extend through 2015 the ability of ME plans to generally start or stop using the shortfall funding method without obtaining approval from Treasury.
Technical Corrections and Deadwood Provisions
In addition to the tax extenders provisions, TIPA contains numerous corrections to various technical and clerical errors. These technical and clerical errors create confusion for taxpayers and complicate administration of the tax laws. Title II of TIPA the Tax Technical Corrections Act of 2014 would make technical and clerical corrections to recently enacted tax legislation, including the American Taxpayer Relief Act of 2012, the Creating Small Business Jobs Act of 2010, and the Economic Stimulus Act of 2008. Notably absent from the list of technical corrections is the Affordable Care Act (i.e., Obamacare). In general, the amendments made by these technical and clerical corrections would take effect as if included in the original legislation to which each amendment relates.
Under current law, there are numerous provisions that relate to past tax years (and generally are no longer applied in computing taxes for open tax years), involve situations that were narrowly defined and unlikely to recur, or otherwise have outlived their usefulness. These types of provisions are often referred to as “deadwood” provisions and TIPA would repeal these current-law deadwood provisions. This repeal generally would be effective on the date of enactment, although the tax treatment of any transaction occurring before that date, of any property acquired before that date, or of any item taken into account before that date, would not be affected.
Tax Breaks That Weren’t Extended
While TIPA came close to providing a blanket extension of expiring tax breaks, not all expiring provisions were extended. Of the sixty tax preferences up for extension for the 2014 tax year, five failed to make the cut: (1) the health coverage tax credit for displaced workers and retirees, (2) the plug-in motorcycle tax credit, (3) the energy-efficient appliance credit, (4) New York Liberty Zone tax-exempt bond financing, and (5) partial expensing of refinery equipment.
Because TIPA only extends tax breaks through the end of 2014, the recently renewed provisions will expire again in two weeks. As it did a year ago, the White House is signaling that any extension of the tax breaks into 2015 will have to come within the context of broader tax reform. For his part, incoming Senate Finance Committee Chairman Orrin Hatch (R-Utah) has released an analysis by the Finance Committee Republican staff titled “Comprehensive Tax Reform for 2015 and Beyond.”
Regardless of the legislative context, the one certainty is that Congress will have to revisit the extenders again next year, and taxpayers will spend much of 2015 guessing whether scores of credits, deductions, and exclusions will be available when the time come to file their returns.
Information provided by Parker Tax Publishing